How many accounts should one have?
Amar Pandit in Mumbai | January 14, 2008
We often end up having a lot of dormant bank accounts.
It's time we cleaned up our act.
Rajesh Sharma, 45, management professional, has
shifted several jobs over the years.No wonder, he has
more than five bank accounts because each time he
changed jobs, the employer opened a new account for
him with their bank.
When his wife asks about the balance in the various
accounts, he has to rummage through the entire pile of
papers in his desk to come up with a reply. The worse
part is that he actually has negative balances in some
of them because he has not maintained the minimum
balance in these accounts. He desperate wants to close
some of them, but does not have the time or patience
to go to a branch and wait there. Surely, a very
common story for many professionals.
Sharma uses one account to pay his credit card bills,
another one for home loan equated monthly instalments,
a third for investments and insurance requirements,
and living expenses from a fourth. Obviously, deposits
and transfers have to be made on an ongoing basis to
meet minimum balances in these four accounts leading
to a lot of confusion. His situation reminds us of the
cliche: keep it simple, stupid. And Sharma has brought
it upon himself.
When we talk about money, having more of it is better,
but when looking for a place to park them, lesser
confusion is certainly better. Of course, it is
important to have more than one bank account. This is
mainly because the money we deposit in banks is
insured to the tune of just Rs 100,000 per account.
So, if god forbid, your bank were to go bust, you
would be in serious trouble.
To address this risk you should have at least two bank
accounts at a single time. Also, for the business
person, it is ideal if your business accounts are kept
away from personal ones. This will make record keeping
easier and ensure that when it's tax time you can
comfortably segregate personal and professional
expenses.
How many accounts should one have?
To answer this question, let us first understand the
various avenues or transactions that would involve a
bank account. Basically there are 2 types:
Inflows (salary, interest, dividend, gifts, rental
income or lottery)
Outflows (loan payments, credit card payments,
lifestyle expenses, gifts, investments, and insurance
payments)
Generally people have these accounts:
Salary account
Salary account/s through previous employer
Dormant accounts
Home loan attached to an account
PPF account (Generally with nationalised banks)
Current account, if you are a business owner
Accounts on the names of spouses and children.
Considering the above and a double income family,
there would at least be around four to six different
accounts. And managing all of them becomes cumbersome
and you realise the complexity of the issue when you
have to collate this information to give your
chartered accountant or financial advisor.
To cut down on clutter, it is best if you have two
accounts and take the following steps:
1. I am sure all agree that the most important account
is the salary account. If your employer does not
provide one, designate one account as your salary or
inflow account. All inflows whether salary, dividends,
interest should go into this
account. (It is likely that you have some fixed
deposits in other banks and hence, some interest
coming there which is easy to manage).
2. Ensure that all your home loan EMI, insurance
payments and investments are made from this account.
You can set up an auto-debit for these transactions
from this account itself. Having one account for your
inflows, as well as your outflows makes your and your
chartered accountant's life much easier. Of course,
many people have home loans and could have a separate
bank account with the home loan account.�
3. Have a separate account for all your living
expenses. You could even opt for a
joint�
utilised for all bill and credit card payments
(including telephone, property maintenance, cable,
food, groceries, petrol, vacation etc.)
4. You could do it the other way around as well, where
you do all the expenses from your salary account and
investments, insurance and loan payments from another
account. Since home or car Loan EMIs, insurance
premiums and investments are well-known in advance,
you can be pretty sure of the amount that you need to
transfer from your salary account.
5. It is important to remember that crores of rupees
go unclaimed every year from forgotten or dormant
accounts. These are mostly because a large number of
people who have not used these accounts for years. It
is best if you have two or at best, three bank
accounts. As they say, too many cooks spoil the broth.
Similarly, too many
accounts spoil your finances.
The writer is director, My Financial Advisor
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